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Unformatted text preview: Hour 1 International Business February 7th 2012 The Valuation of Facebook Mark Zuckerberg - Facebook founder Will soon be worth upwards of 27 billion dollars Facebook will have an IPO (Initial Public Offering) within the next month Shares of Facebook reportedly selling for $32 PE Ratio = 1/r-g P = Price per Share E = Earnings Per Share 32/.40 = 80 32*2.5 Billion Shares = 80 Billion Dollars Revenues = 7 Billion Dollars So, How much should we be willing to pay for a share of Facebook? P = E / r-g r = rate of return on similar investments g = expected rate of growth of future earnings 80 = 1 / r-g r-g = 1/80 = .0125 Facebook appears to be a riskier investment than a U.S. Treasury security r = 10% g = .0875 = 8.75% The problem with this Formula is that the growth level (g) is assumed to remain constant Saint Petersburg Paradox: Coin toss that says you get paid when coin lands on heads 1st ip = heads = $1 2nd ip = heads = $2 30th ip = heads = $537 million Shows that the expected value is innity Your not willing to take this risk because you are risk averse. The economy will not grow this much. (g) will not say at this level forever and eventually it will decrease. How to Approach the Value of Facebook? Comparable companies and their Initial Public Offerings (IPO) Google $100 Billion Market Cap Microsoft $250 Billion Market Cap Apple $450 Billion Market Cap Denslow Says that he personally would not value Facebook greater than $5 dollars per share. Suppose Facebook launches for 2012 100 Billion Suppose Facebook is worth 120 Billion in 2022 This growth level would be identical to that of Google s This would Provide for an IRR (Internal Rate of return) of 6.8%. A decent return, however, not spectacular Strengths and Weaknesses of Facebook Strengths of Facebook Assets - An inventory of people and data (granular data) Social marketing - Now called Social commerce - what makes someone most likely to buy something based on their personal online histories....
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